Oil and gas tax flap looks bad for in­dus­try, even if it’s not

The Denver Post - - OPINION - By Me­gan Schrader Me­gan Schrader (mschrader@ den­ver­post.com) is a Den­ver Post ed­i­to­rial writer and colum­nist. Fol­low her on Twit­ter: @Me­ganSchraderDP

Some oil and gas op­er­a­tors in Colorado are retroac­tively claim­ing mil­lions in tax de­duc­tions made pos­si­ble by a re­cent state Supreme Court rul­ing.

That cer­tainly doesn’t do much for the in­dus­try’s im­age in a state where there’s al­ready hos­til­ity to­ward the hy­draulic frac­tur­ing be­ing used to ex­tract nat­u­ral gas and some oil in north­ern and west­ern Colorado.

When I first heard about the tax de­duc­tions, while cov­er­ing the 2016 leg­isla­tive ses­sion, it seemed like the kind of tax avoid­ance that makes my blood boil. Cou­ple the de­duc­tions with low oil and gas prices, a re­duc­tion in op­er­a­tions, and a credit on prop­erty taxes and the in­dus­try paid only $18.9 mil­lion in sev­er­ance tax in 2015-16 — a 93.3 per­cent de­cline.

But that $262.4 mil­lion in lost rev­enue is not as ne­far­i­ous as it seems.

It takes some­thing like a Ph.D. in rocket science to un­der­stand how Colorado levies sev­er­ance tax on oil and gas pro­duc­tion, so for­give me if this is un­clear.

The sheer com­plex­ity is also prob­a­bly why state of­fi­cials so grossly over­es­ti­mated the im­pact of BP Amer­ica vs. Colorado De­part­ment of Rev­enue.

The state guessed the rul­ing would cost $100 mil­lion.

It turned out to be closer to $18 mil­lion in the 2015-16 fis­cal year, and for prior tax years (from 2012 to 2014) the amount is es­ti­mated to be be­tween $20 mil­lion and $40 mil­lion.

Sev­er­ance tax is levied at the point the nat­u­ral re­source is “sev­ered” from the land. In this case, it’s at the mo­ment oil or nat­u­ral gas reaches the sur­face.

Com­pli­cat­ing mat­ters, the tax isn’t levied on the quan­tity of prod­uct ex­tracted, but what the prod­uct is worth. For some com­pa­nies this is easy to de­ter­mine. They sell the prod­uct im­me­di­ately to a third-party op­er­a­tor. Voilà: value.

But for a few large com­pa­nies that own the pipe­lines and the pro­cess­ing plants and then sell a highly re­fined prod­uct, it’s much more dif­fi­cult to de­ter­mine what the prod­uct was worth when it first came out of the ground.

The state has al­ways al­lowed the op­er­a­tors to deduct from the fi­nal sale price of the prod­uct “any trans­porta­tion, man­u­fac­tur­ing and pro­cess­ing costs.” The BP rul­ing also al­lows them to deduct their prof­its, called the “cost of cap­i­tal,” from those three cat­e­gories.

Let’s give BP the ben­e­fit of the doubt that they and the Supreme Court jus­tices are right. Af­ter all, if a com­pany can’t make a profit, why would they in­vest in pipe­lines and pro­cess­ing plants?

But now that the new de­duc­tions ex­ist, it’s opened up a can of worms for law­mak­ers to re­visit the over­all tax bur­den on op­er­a­tors and ques­tion whether they are pay­ing “enough.”

Also in that can are tax cred­its await­ing scru­tiny.

A ma­jor­ity of what a com­pany pays in lo­cal prop­erty taxes can be de­ducted as a state tax credit to re­duce sev­er­ance taxes. It’s im­por­tant to note the in­dus­try pays prop­erty taxes on more of their prop­erty value — much more — than any­one else in Colorado. In 2015 op­er­a­tors paid more than $403 mil­lion in Weld County.

So what is the ap­pro­pri­ate tax bur­den for an in­dus­try that is a huge driver of our econ­omy, pro­duces a re­source we rely upon for en­ergy, but also re­lies on a fi­nite re­source that dis­pro­por­tion­ately im­pacts our in­fra­struc­ture and en­vi­ron­ment?

Ar­guably, it’s one that is high enough to off­set the im­pacts, but one that is low enough to en­cour­age in­vest­ment in a risky and ex­pen­sive ven­ture in our state.

Per­haps in ret­ro­spect, given the ker­fuf­fle a cou­ple mil­lion dol­lars in ex­tra de­duc­tions caused, the in­dus­try would be wise to re­con­sider nickel and dim­ing the state — even when they are right — and con­sider their big-pic­ture tax bur­den.

Be­cause now I’m sure the pub­lic and law­mak­ers are go­ing to be tak­ing a closer look, too.

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